 Hello. In this lecture, we're going to take a look at some problems that will be shorter problems. These are problems that could be in a multiple choice type format. We're not going to go over multiple choice settings, but these are the smaller type of problems that can be in a multiple choice setting. And we'll take a look at the stem and work through these. I'm going to pull this on this side and then we will take a look at a problem that is open. This happens to just be an example type problem. I do recommend having some other example problem open. It could be the book. It could be just some worksheets. I do recommend, in my opinion, the trial balance of some kind is the best thing to have open. This is a trial balance problem that actually has closing entries, which we'll see a lot of times in the types of questions we'll be looking at. But just a trial balance will give you the assets, the liabilities, the equity, give you an idea of what accounts are debit type accounts and what accounts are credit type accounts. All right. So let's look through this. For the year ended December 31st, a company has revenue of 322 expenses of 198. The owner's withdrawal was 52,000 during the year. The balance in the owner's capital account before closing 86,000 entries used to close the withdrawal account. So we have the whole closing entry process at this time, but they're only asking us about the draw account. That's one of the difficult things about the smaller problems because that's almost harder. We're leaping in above what we would normally do. So if we look at the total process, I'm just going to look at this problem real quick. This is a different problem, but it's a closing problem. And so we'll just look at this and just remember that there's four steps to closing. One, we close out revenue and that makes this go to zero. And then we close out expenses to the summary account. That makes all these go to zero and then we close out the income summary to capital. That takes it out of the income summary to capital. The last thing we do with the draws, that's all they ask us for is draws in this case. So that's the only thing we need to do and I'm going to snap this back over on this side. I'm going to pull this over here. We need to get rid of the draws. Now, once again, if we look at this, we could say, hmm, draws normally have a debit balance. What are draws? That's what the owner has taken out of the company. And it's a temporary account. All accounts below the capital account are temporary. We need to make that go to zero and the difference is going to go to the capital account. So how do we make something with a debit? It has a debit because it doesn't have brackets around it. In this case, go down. We do the opposite thing to it. So we're actually going to credit the withdrawals. So if I was going to write the journal, I'm just going to call it draws. And that's going to be a credit and the credit of, in this case, the 52,000 because that's what the draws say here. And then we got to debit something, of course. What's the debit going to be? It's going to be capital because that's where it's going to go to. So it's going to reduce draws 52,000. And you could represent it with a credit if you want a negative like the represented here or just a positive just depends how the format will be. And what will that do? Well, it would close out draws and it would reduce the capital account. Why? Because the capital account has a credit balance. That's what's represented to owed to the owner. And if the draw, if the owner took it out, then it's no longer owed. It's going to reduce the capital account. Next one we have a company shows 730 balance in prepaid rent and the unadjusted trial balance columns of the worksheet. The adjusted columns show expired rent of 265. This adjusting entry results in what effect in net income. So this one, we're just going to have to think through and see what the journal entry would have done to net income. So if we were thinking about the adjusting entry for prepaid rent, we would say, oh, that's some kind of prepaid. Now I'm just using a random trial balance. I don't have prepaid rent in this particular trial balance, but we do have a prepaid something, which we can see is a debit balance account. So we could say, think through that and say, well, what happened? There's one, there's going to be a prepaid something and then there's going to be something on the bottom side. That's why that's how adjusting entries work is always an account in the balance sheet portion and account in the income state portion. The income state portion is going to be called rent expense. So if it was rent expense, it's going to be the debit rent expense. And why is it a debit? Because all there's always going to be debits for expenses and they only go up expenses generally only go up. So in the adjusting process, it would go up. So we would debit the rent expense and that means we would have credit than the prepaid rent. So we're going to say that's going to be 265 and the credit is going to be for 265 to prepaid rent. So that's the journal entry. Now we need to see what that would do on net income and net income. If we look at over here, we'd say that we're, how do you calculate net income? Well, it's right here and it's the debits minus the credits. So if we double click on this, it's going to be the revenue minus the expenses. So we know that the expense here wins up. So they went up in the debit direction. If expenses go up, it's going to bring net income down. So what's the effect on net income from this journal entry? That is bringing net income down. Next one we have here. A company recorded adjusting entries at December 31st a year and at December 31st employees had 10,000 of unpaid, unrecorded salaries. The next payday is January 3rd. So note that that's after the cutoff date. So we made the financial statements as of the end of the year then, but we're not actually paying them until the next day. So at which time they're going to get the 25,000 for the full entire a period. So prepare the journal entry on January 3rd to record payment assuming the adjusting and reversing entries made on December 31st and January were made. So this is a bit tricky because basically they're asking us for the third entry making the assumption that we did an adjusting entry and then we reversed it. So what is the adjusting it? Let's think about all three entries and see why the answer would be what it would be. So first let's think about the adjusting process. So we're going to adjust payroll in this case. So an adjusting entry is going to have one balance sheet account. Again, this is just a rant. This isn't this trial balance does not relate to this problem, but any trial balance would be helpful to have us just having them open. And so we're just going to say, okay, there's going to be one balance sheet account, something above the line here related to payroll. So in this case, it's going to be wages payable here. So I'm going to say that wages payables affected and then there's going to be something below the line here related to wages and that of course would be wages expense. Wages expense like all expenses have debit balances. We're going to make it go up by doing the same thing to it, which in this case would be another debit. So I'm just going to copy this over here and see if I can paste it on this side. So the adjusting entry would be a debit of 10,000 and then a credit, the credit must be going then to wages payable. So wages payable, that's our adjusting entry. That happens as of the end of the year on 1231. However, if we do our adjusting entries, the idea of the adjusting entries as of one of the next year of January 3rd or January 1st of the next year on one is going to be our adjusting entry. So the reason we're going to reverse it as of January 1st, even though we don't pay them until January 3rd is because we do not want the adjusting department to have to worry about our adjusting entry here. So we made it correct as of the financial statements date. Then we're going to reverse this exactly as of January 1st the day after we make the financial statements. So that would look like this. We're just going to reverse this. So I'm just going to debit wages payable and I'm going to credit wages expense. Now this is going to make a negative expense, which isn't really perfect to cruel here. This isn't actually right. We're crediting expenses, which is kind of weird, but it works in terms of a system in which the adjusting department is different or separate from the department that is doing payroll. And so that's why we do that process. Then finally, if we get to 1-3 and we're saying that we're going to record the payroll, the payroll was for 25,000 for the entire week, part of in December of last year, part in January of this year. And if we didn't do this reversing entry, we would have to apply, we would have to reverse it in the payroll journal entry. That's what we're trying to avoid by having this reversing entry. Therefore, the payroll entry can be just what it would normally be, meaning is cash affected? Yeah, we're going to pay the employees cash. Cash is a debit balance. We're going to make it go down by doing the opposite thing, which is a credit of 25,000. And we don't have to adjust for the fact that, and then we're going to debit, in this case, wages expense. And we're going to debit wages expense, in this case for the entire 25,000 not having to account for the fact that 10,000 of it was for last period. And the reason is because the net of this between our adjusted entry and this is 15, and that's really what the true expense is as of January 3rd. So notice our expenses wrong from January 1st and January 2nd until we make this entry on January 3rd. And that makes our expense 15, which is really what was expended, the expense as of January 3rd, as of the new year. And it's not really 25,000 because that's what we paid. However, only 15 of it was earned for January. So next one we have here at companies December 31st worksheet for the current period appears below based on the information provided. What is net income? Now, what we have here is we got debits and credits. This is going to be the beginning balance and these are the adjustments. What we don't have is the last column over here, which would be the ending balance. So what we're looking for is net income. So we have these two columns. This is what we started with. We're looking down here. I'll just highlight this and make it a different color. We'll say this is green. And what we're doing is we're basically, we're going to have to add these two up. And we could just make another column. We could pull it over here and say, what's going to be fees earned? That's income. That's revenue. We're going to add a credit. And then we have an adjustment of a credit. So that's going to be this 7, 3, 3, 0 plus the 7, 3, 3, 0. Sorry, I'm going to do that like this. 7, 3, 3, 0 plus 9, 5, 5 is going to be the 8, 2, 8, 5. And then we've got the rent expense, no adjustments. That's just the 1, 3, 8, 0. Salaries, 2, 3, 8, 0. Utilities, 4, 2, 5. Insurance was 0. And then we made an adjustment of 7, 30. So 7, 30 here. And then we have insurance was 0. We made an adjustment of 195. And then depreciation was 0. We made an adjustment of 270. So total expenses then. I'm just going to add these up with the sum function. Total expenses is this plus this plus this plus this plus this. And therefore income equals, we've got equals. Net income is going to be the 8, 2, 8, 5. That's our revenue. That's our income. That's how much we made minus the expenses 5, 3, 8, 0. And of course, if we did that in a calculator, all we're doing is saying, I'm going to add up this column. 1, 3, 8, 0 plus 2, 3, 8, 0 plus 4, 2, 5 plus 7, 3, 0 plus 1, 9, 5 plus 2, 7, 0. That gives us the 5, 3, 8, 0. That's our expenses. It's calculated as revenue 8, 2, 5, 8, 5 minus expenses 5, 3, 8, 0. Gives us net income of 9, 0. Sorry. 2, 9. Next one, we have for the year ended December 31st. The company had revenues of 193,000 expenses of 115, 8. The owner was through 38, 6 during the year entry to close income. So here we have our closing process one again. I'm going to pull this to the side. And again, I'm just looking at a random trial. I'm not looking at a trial amounts related to this problem, but it'll give me some ideas here. So we have our closing journal entries. Now these are the four steps of the closing journal entry process. Remember that we close out income. We make this zero. We close it out to income summary. And then we close out all the expenses, meaning we make all these zero. And we close them out to the income summary. Then we close out the income summary, which has net income in it at that time, to capital. And then we close out the draws. So notice that the question here is a little bit tricky. They're tricky because they're only asking one piece of the four piece process. And they're giving us more information than we need to do the one piece of the four piece process. The piece they're asking for is to close out income. That's the first entry. That's the first thing we do. So on a trial balance, it could be called revenue income sales, whatever. It's got a credit balance here represented by a negative number or bracketed numbers. We need to make it go down. So we're going to debit it. So whatever it's called, if it's revenue income, whatever, we're going to debit that one for the amount that's in there, in this case being $193,000. And we're going to credit something for $193, that being the income summary. Remember, we're going to close it out. This is called a clearing account. We're closing it out to this new account that's going to be zero at the end of these four journal entries at the end of the closing process. And that's all we need in this case. They gave us more information to do more of the closing process. But the only thing they've asked us for, as is the case in many multiple-choice questions, is that one piece of it. Next one. We have to use the information in the adjusting trial balance presented below to calculate current assets. So we have the adjusted trial balance. And it's going to be in order just like this adjusted trial balance, right? It's going to have assets and then liabilities and then equity down here and capital. And it's got, it looks like it's a post-closing trial balance. It's got no income and expenses. It stops at the equity section. So we need to just add up and calculate the current assets. So what are current assets? Cash. It's current. Receivables are current. Free-paid insurance is a current asset. Equipments? No, not a current asset. Meaning it's not very liquid. Meaning we can't really sell the forklift too easily to pay off our credit card bills. So that one's not as liquid. So we're going to say these are the three that we need to add up. And if we add those up, then it would equal a 41,000 plus the 22,000 plus the 9,000. Of course, if we did that in the calculator, 41,000 plus the 22,000 plus the 9,000. And obviously, if you're in a rush, if they all have zeros here, it's just 41 plus 22 plus 9, which gives us 72,000, of course. Next one says company had annual revenues of 205 expenses of 27,000 and withdrawals of 26,000 from the business during the current year. The owner's capital account before closing had a balance of 317 net income for the year is. So if we take a look at our trial balance over here, again, this is not a related trial balance. But if we take a look at it, we say, hmm, net income, how do we calculate it? It's going to be revenue minus expenses. So they gave us more information than we needed once again. But if they gave us those two pieces, meaning revenue and total expenses, all of these total expenses being all these put together in the trial balance, revenue minus expenses is how we would calculate net income. So what's going to be the revenue? They said it was 205,000. And they said that all expenses, meaning they added all these up for us, basically. And that comes in not these, of course, but the same types of counts on a similar trial balance. We're just using that as a reference of 1137. And that means that net income is equal to 205 minus 1137. And that's the 91.3. Next one, company had annual revenues of 205, expenses of 113.7 and withdrawals 26 from the business during the current year. The owner's capital account before had a balance of 317. The Indian owner's capital account balance after closing is. So we could try to think about this one by thinking what the journal entries do and just put it in a list of numbers here. You may want to, I mean, if you want to go through the journal entries, that might be a way to do it. That's a longer way to do it. But let's try to think about the journal entries and think about what that would do to the capital account. So once again, it's good to have our trial balance over here to see the trial balance. These are our four entries that we can do here. And they basically gave us the information to do those. So we could do that in that format. We could say, OK, well, first we'd have to close out revenue. So that would mean that something like revenue has a credit balance. We would have to do the opposite thing to it, which is debit revenue. And then we would put that to the income summary. Income summary account would then be credited. So that would mean that we would debit. They gave us revenues of 205,000 and credits the income summary. Then all the expenses would be closed out to the income summary. This one, they're listed out and they just gave us the expenses as a total here. So we could just say, OK, all expenses then. So expenses have a debit balance. We've got to credit the expenses. Just like we did in the example here, we credited all the expenses individually. Here we just have a one lump sum number. And then we would debit the income summary account. Again, I'm just going to copy that and paste it here. And therefore, we're going to debit the income summary. And then what is, let's make this a negative 1, 1, 3, 7. And then we know what's in the income summary at this point in time. If we think about the income summary account and we think about this as a T account where the debits are on left, credits are on the right, what have we done? We've credited it by this amount. And then we debited it by this amount. So we have a balance in there of the credits minus the debits. We credited it by this amount and we debited it by this amount. So that means that the credits are winning now by 91.3. That 91.3 is net income because that's all the revenue and all the expenses are now in the income summary. That's 91.3. So this is our T account here, our general ledger account. You can also think of that down here when we sum them up. And then what we're going to do is we're going to close out the income summary account. So the income summary has 91.3 in it. So credit, we then need to debit the income summary. So I'm going to copy that. I'm going to debit the income summary for the 91.3 and credit something for 91.3 and that's going to be capital. And that's the one we're actually looking for. The owner's capital account here. So if we think about those two then what actually happened, here's our T account for the income summary and what we did now is we debited 91.3 and that makes the balance go from 91.3 down to zero. We close that out. If we think about the capital account, T account, we have a beginning balance that they gave us here. The beginning balance is, the owner's capital account before is 317. And it's a credit. So I'm going to put 317 credit balance here. So remember this is kind of like we're going to center this across. That's our capital, like so. And so we have a credit balance in it and then what we did is we credited it again. So we're going to say that we credited it again in our T account. So in our balance then it went up. It went from here to here. So that's what's in there now. Now we're going to see if there's any draws. That's going to be the owner's capital account. They withdrew 26. That's our last journal entry. So 26 is what was withdrawn. So I'm going to add a couple of cells here. So withdraws has a debit balance. We need to make it go down. So we're going to credit the draws. So I'm just going to copy this. And we're going to credit draws for the number that they gave us, which in this case was 26. So credit 26,000 and debit 26,002. Once again the capital account. So it's going to go in the capital account. So if we think about the capital account, that's what they ultimately asked for, right? The owner's capital account balance after closing. It started here. Then we brought it up by net income. And then we brought it down by draws, which is a debit in this case, to the capital account. And so we're going to say this is what we had before and there's the draws. So the ending number then is 382. Three in the ending capital. Now if we have a good understanding of the capital account, we could do that a lot shorter of a way. We could say it has the beginning balance. The beginning balance in terms of not debits and credits, but just plus and minus, like it would be on the financial statement in the equity section. The beginning balance is 317,000. And then it's going to go up by net income. Because we're going to close out net income to it. What is net income? It's revenue minus expenses. 205 minus 1137. So this equals the 205,000 minus the expenses of 1137. That's what it's going to increase by. And then it's going to be less decreased by the draws. That's going to be what lowers the capital account. And the draws we said was 26,000. And therefore we're going to have this plus net income minus the draws. So 317 plus to 913 minus to 26. That would be the end capital. So those are two ways to do it. Obviously this one's a bit more straightforward. But if you're used to seeing journal entries and T-accounts, we have the information needed to basically go through the four journal entries and put a T-account in there for the capital. Next one, after these closing entries, what will be the balance in the capital account? So we have a similar thing here. And again, we could go through the four closing journal entries and just close it out to the income summary and then close it to capital. Or I'm going to just do it in the shorthand way this time. Notice if we have capital here, that means it's kind of like the beginning capital usually. That's our beginning capital of 128,000. So that's like what would be in our trial balance here before we close everything out to it. And then it's going to go up by net income. So how do we calculate net income? Revenue, less expenses. So that's going to equal the 200,000 minus the 96,000. And then it's going to go down less with draws. So minus the withdrawals 24,000 gives us ending capital. So this equals the 128 plus the net income 104 minus the draws of 24,000. So here's the next one. After these closing entries, what is the balance in the capital account? And again, it might as well just, we could do the journal and truth and may as well just kind of memorize this formula here though. So we have the beginning capital. And remember when they say capital here, they mean the beginning, like it's in the trial balance before we close everything out to it. So that's the beginning trial balance capital account of 1375. It's going to go up by net income. And notice they threw us a bit of a curve here, compared to the prior problem, in that they just gave us net income. What's net income? Revenue minus expenses. So they gave us to us already. And that's the combination of these two journal entries. So that's revenue minus expenses that we usually close out to the income summary and then close out to capital. They're just going to give it to us here in one number, 57.5. And then we're going to say less draws or withdrawals of 18,000. So we're going to say it's going to be the beginning capital plus the net income, minus the withdrawals. And that's going to give us the ending capital, in this case 177. So that's the ending capital balance. Next one we have the company capital account has a credit balance of 20,400 before closing entries are made. If total revenue for the period is 65,000 total expenses of 47,400 draws 10,008. What is the ending capital account after closing? So once again, we're just going to plug this into the formula. We could do the journal entries on this, but we'll just plug it into the formula here. So we're going to say that the beginning capital remember, that's going to be our capital account kind of here is what they gave us. So capital account has a credit balance. And we could do it with a T account like that, but I'm just going to do a plus and minus formula. 20,400, this would be how you would basically see it on a financial statement. Total revenues then, revenues are going to be 65,200, and expenses are 47,400. So I'm just going to call that net income. They gave us enough to calculate net income. That will be the quickest way to do it. How do we calculate net income? Revenue minus expenses. So this equals revenue 65,200, minus expenses 47,400. And then how do we, this is basically our equity section, our statement of equities. And this is how we're going to calculate equity, the ending balance and equity in our financial statement of equity. And we're going to say less draws or withdraws. Draws is easier to type. And then we're going to say they say draws is 10,8. So that means that ending capital, capital after we close out equals the beginning capital plus net income minus the draws. Next one on capital account has a credit balance of 48,000. Before closing entries are made, total revenue are 66,200, expenses are 45,300, and withdraws are 13,400. What is the correct closing entry for revenue accounts? So this is a bit of a tricky one because they're only asking for one journal entry out of the four in the closing process. Remember the four closing entries are going to be close out revenue to income summary. This to this. Then close out expenses to income summary, meaning these to here. Then close out what's in income summary, which will be net income to capital, meaning this to here. Then close out draws to capital, meaning here to here, giving us all zeros, making us ready for the next period. In this case, however, even though they gave us a lot of information we don't need, they only asked us for the journal entry to close out revenue. So the thing we got to know about that is that revenue has a credit balance. So that's the key here, because if we don't know it has a credit balance, we don't know how to make it go to zero. That's what we're trying to do, is make it go to zero. If it has a credit balance, we need to do the opposite thing to it in order to make it go to zero, which in this case will be a debit. So we're going to debit the revenue, and we know that they said that the revenue has 66.2, and then we're going to credit something, and we generally put that in our four-step system into the income summary clearing account. So once again, that's the journal entry. It's only one of four. Then we would close out expenses. Then we'd close out the income summary to capital. And then we would close out the draws. Next one, capital account has a 44,000 before closing. Total revenues are 62.2, expenses 43.3, and withdrawals 11.8. What is the correct closing entry for expenses? So once again, it's kind of tricky because they only asked us for one of the four accounts once again, but instead of asking us for revenue this time, they asked us for closing out the expenses. That's this journal entry. Normally that's a long journal entry because normally there's a lot of expenses. But in the multiple choice question, they're going to make it all condensed down, and they're going to say it's just all expenses kind of put together. It's if we had one giant expense account, which would make the accounting a lot more easy if we could just put them all in. So anyways, so how are we going to do that? Expenses have debit balances, and we're going to make it go down by doing the opposite thing to it. We're going to credit the expenses. So all expenses are going to be credited. And again, we would be doing this one expense at a time, not like crediting all expenses, but the same idea is the case. So they say that expenses are 43, and I've just put in a negative in mind to represent credits. You don't have to put a negative in there. It's on the format. And then we are going to debit, once again, the income summary. So the income summary account. And that's going to be here. Once we clear out the revenue to the income summary and the expenses to the income summary, what would then be in the income summary? Net income.